6 reasons to buy Starbucks

Shares of Starbucks Corp. got a 5% lift on Wednesday after Deutsche Bank resumed coverage of the coffee giant with a Buy rating and US$41 price target. Analyst Jason West sees further upside in the coming quarters, after Starbucks’ dramatic profit recovery over the past two years.

He highlighted continued momentum in the United States, international gains in both unit growth and margins, and an inflection point for the company’s global consumer products segment.

Mr. West provided clients with six reasons while the Starbucks story still has legs.

2. Same-store sales may remain above trend longer than many expect thanks to new operating tools such as updated point-of-sale systems at the store level. The macro recovery and incremental menu pricing also bode well for SSS growth.

3. International margins still have plenty of recovery room. Given the 730 basis point international margin gain in the first quarter, guidance of 150-200 points looks conservative.

4. Unit growth is on the verge of accelerating again, after a slowdown during the recession. Vastly improved return on investments at new stores pave the way for more aggressive unit growth in 2012 and beyond.

5. Starbucks’ consumer products group is poised for even better growth in coming quarters. It generates the highest margins and return on investment among the company’s global portfolio, but has trailed the recovery seen in other segments.

6. While Starbucks is working on boosting revenue and profit growth, it should continue to generate attractive levels of free cash flow (~$1.3B annually) and healthy dividend growth (~5% yield).

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